What is Principal Purpose Test (PPT)?What is OECD/G20 Inclusive Framework?

Principal Purpose Test (PPT) :

The Principal Purpose Test (PPT) is a specific rule introduced under BEPS Action Plan 6 to stop “Treaty Shopping.”

Treaty Shopping: When a company from Country A sets up a “shell company” in Country B just to use Country B’s favorable tax treaty with India.

How the PPT “Test” Works?

The tax benefit (like a lower 5% tax) is denied if:

• Subjective Criteria: One of the main purposes of the arrangement was to get a tax benefit.
• The Exception: The benefit is only granted if it aligns with the object and purpose of the treaty (i.e., genuine trade).

Why the 2025 CBDT Guidance is News?

• Prospective Only: It clarifies that PPT won’t be used to “harass” old investors. It applies to transactions/tax events generally after April 1, 2017 (for GAAR alignment) or when the MLI (Multilateral Instrument) kicked in.
• Grandfathering: Historical investments in Mauritius, Singapore, and Cyprus are protected (exempt) from PPT to maintain “Ease of Doing Business” and investor trust.

What is OECD/G20 Inclusive Framework?

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) is a global collaborative platform allowing over 145 countries and jurisdictions to work together on an equal footing to update international tax rules.

It combats tax avoidance strategies used by multinational enterprises (MNEs) that exploit gaps in tax laws to artificially shift profits to low-tax areas. 

 Key features of the Inclusive Framework include:

• Two-Pillar Solution:A major reform aimed at taxing the digital economy and ensuring a minimum tax rate.

• • Pillar One: Allocates a portion of taxing rights over the largest MNEs to countries where customers are located, regardless of the company’s physical presence.
  • Pillar Two: Implements a global minimum corporate tax rate of at least 15% for large MNEs to reduce tax competition.
  • Collaboration: It allows both OECD/G20 members and non-members, including many developing countries, to collaborate on implementing BEPS standards.
  • Focus Areas: The framework covers 15 action items to address profit shifting, ensure transparency, and enhance the digital taxation framework.